Chancellor Kwasi Kwarteng is on track to make some tough policy choices at his next budget, including big spending cuts, a think tank has said.
According to the Resolution Foundation, the scale of tax cuts and a weak economic outlook will mean that the government is likely to need to announce fiscal tightening of between £37bn to £47bn in order for debt to be falling by 2026-27.
“This level of fiscal tightening would require announcing spending cuts that are broadly the same or bigger than George Osborne set out in his 2010 Emergency Budget,” Resolution Foundation said.
This includes cutting public investment back to its 1996-2016 average, saving £25bn by 2026-27 — but also reducing economic growth in the process.
In addition to this, uprating benefits, including the state pension, by earnings instead of inflation next year — effectively a four percentage point real-terms cut.
This would raise £11bn in one year, rising to £20bn over two years, but would cost a typical low-income working family with two children over £1,000 a year.
To avoid even deeper spending cuts, prime minister Liz Truss will also need to abandon her pledge to increase defence spending to 3% of GDP by 2030. This would cost a further £12bn a year in 2026-27.
It also forced an emergency intervention from the Bank of England (BoE).
Kwarteng announced £45bn of permanent tax cuts during the mini-budget, however, he failed to provide any further details of how they would be paid for.
Expectations of future interest rates have also climbed by around one percentage point over this period — adding over £1,000 a year to the average mortgage bill, and increasing the government’s debt interest costs by around £12.5bn a year by 2026-27.
“Last Friday the UK saw the biggest unforced economic policy error of my lifetime, with a huge package of tax cuts announced against the backdrop of already rising interest rates, and without any explanation of how they would be paid for,” Torsten Bell, chief executive of the Resolution Foundation, said.
“Lower taxes combined with a loss of market confidence mean rising interest rates, leading to higher mortgages and lower living standards. But looking further ahead they will mean lower spending too.
“Without U-turns on some tax cuts, the chancellor has eight weeks to decide which unpleasant combination of growth-reducing public investment cuts or income-reducing welfare cuts he is going to announce.
He added: “The UK is not unique in experiencing tough economic times amid rising prices and interest rates. But it has uniquely chosen to make things significantly worse through its own policy choices. The intention may have been to emulate Margaret Thatcher, but the reality may involve looking a lot like George Osborne in the years ahead.”